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May 2, 2008

Lenient bankruptcy legislation blamed in credit crisis

by Gill Montia

Story link: Lenient bankruptcy legislation blamed in credit crisis

The National Institute of Economic and Social Research (NIESR) is calling for changes in bankruptcy laws in the UK and US because it believes their less than draconian powers are partly responsible for the credit crisis.

UK bankruptcy law was reformed in 2004, since when bankrupts can be discharged after one year rather than three.

The institute sees this change as having fostered a lax attitude in some borrowers, encouraging them to take on more debt than they may be able to manage.

The NIESR is also proposing that bankruptcy laws should be co-ordinated internationally.

This could be beneficial because when mortgage securities are sold on the debt markets, buyers would be less likely to receive any nasty surprises with regard to the number of potential bankrupts contained in the securities.

Mortgage securities emanating from countries with weak bankruptcy laws and poor lending practices could be approached with caution.

In addition, Martin Weale, the institute’s director, is suggesting that the Government should introduce credit controls that could limit loan-to-value ratios on mortgage lending.

Accountant, KPMG, is forecasting that a record 130,000 Britons will declare themselves bankrupt or enter into an individual voluntary arrangement (which means they will only repay an agreed proportion of their debt), in 2008.

 

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